Directed Trusts, Trust Protectors, and Special-Purpose Entities:

South Dakota's unique trust laws allow individuals who establish a South Dakota trust to appoint a trust advisor, an investment trustee, or committee, which in turn can select an outside investment advisor(s) and/or manager(s) to "direct" the trust investment management.

The SDTC's "directed" trust combines the fiduciary expertise of SDTC with the skills of a client's own investment advisors. This combination of services provides exceptional management and administration of one's trust combined with the comfort of retaining one's trusted investment advisors.

Any type of trust can be established as a "directed" trust. This includes both revocable and irrevocable trusts.

The trust instrument vests control over investment discretion with an outside advisor and exonerates the administrative trustee. This is also supported by South Dakota statute.

The typical "directed" trust has SDTC as an administrative trustee and/or custodian, but an outside investment advisor/manager is responsible for the trust’s investment management. There are many ways of structuring each scenario, based on the client's needs.

The trust’s investment trustee or committee or trust advisor, typically comprised of the client’s family members and/or advisors, directs that the investment management be handled separately by the client’s outside investment manager. The trust advisor, investment trustee, or committee directs the administrative trustee, SDTC, as to how the trust will be invested and invests pursuant to an Investment Policy Statement.

Additionally, a distribution committee may be established to determine when trust distributions should be made. Family members can serve on this committee and determine all distributions of income and principal for "health, education, maintenance and support" (HEMS). Any additional distributions would be tax sensitive and require an independent trustee (e.g., SDTC, CPAs, and/or Attorney etc.). South Dakota is one of the few states with statutes allowing the administrative trustee to accept direction regarding distributions. SDTC can typically be removed at anytime as administrative trustee. Alternatively, if desired, SDTC can step into any of the committee functions.

SDTC's technology connects investment managers via a secure internet connection so that the investment manager may manage the account and execute security transactions electronically. SDTC has Advent technology for the purpose of interfacing the trust administration with the investment managers, if desired.

Trust Protector

South Dakota was the first state to enact a trust protection statute in 1997. The Trust Protector is also being utilized more and more with domestic trusts to supplement the investment and distribution committees of many "directed trusts." A few states in addition to South Dakota now have trust protector statutes. Advisors are also drafting the trust protector function into the trust documents even in states without specific statutes. Some of the powers often given to a trust protector are as follows:

• Modify or amend the trust instrument to achieve favorable tax status or respond to changes in the Internal Revenue Code, state law, or the rulings and regulations there under
• Increase or decrease the interest of any beneficiaries to the trust
• Modify the terms of any power of appointment granted by the trust. However, a modification or amendment may not grant a beneficial interest to any individual or class of individuals not specifically provided for under the trust instrument
• Remove and appoint a trustee, trust advisor, investment committee member, or distribution committee member
• Terminate the trust
• Veto or direct trust distributions
• Change situs or governing law of the trust, or both
• Appoint a successor trust protector
• Interpret terms of the trust instrument at the request of the trustee
• Advise the trustee on matters concerning a beneficiary
• Amend or modify the trust instrument to take advantage of laws governing restraints on alienation, distribution of trust property, or the administration of the trust

South Dakota Special-Purpose Entities

The special-purpose entity is a South Dakota LLC or some form of South Dakota corporation that houses the trust protector as well as the investment and distribution committees. It is not a trust company. The sole purpose of the special-purpose entity is to direct SDTC, as administrative trustee, as to the trust investments, distributions, and trust protector functions. South Dakota is one of the few states that allow a special-purpose entity.

The special-purpose entity alternative is generally used in combination with the "directed trust" structure discussed above. A recent trend is to establish unregulated special-purpose entities in South Dakota, such as a South Dakota limited liability company or some type of corporate entity to place a liability umbrella over the heads of the individuals filling the roles of trust protector, investment committee and/or distribution committee who are employed by the special-purpose entity.  

 

It is very difficult, if not impossible, to acquire liability insurance coverage for individuals serving co-trustees as committee members and/or trust protectors. However, some insurance companies will provide coverage to a special-purpose entity established specifically for these purposes, thus protecting the trust protector and committee members. Such an entity would also provide legal continuity of its corporate existence by continuing without regard to any single individual's death, disability or resignation. The entity typically has by-laws that allow for additional members to be added or removed so that the entity can continue along with the trust. These entities have to be properly structured to avoid estate tax inclusion issues.

There are no specific state statutes for these special-purpose unregulated entities; however, South Dakota generally allows families to establish such unregulated companies on a case-by-case basis. These entities must generally be exempt from regulated Private Trust Company status and are typically special-purpose type entities with limited defined duties.